ACCC aims to prevent market dominance

One of the roles of the Australian Competition and Consumer Commission (ACCC) is to ensure that too much monopoly power isn't created through mergers or acquisitions. A often quoted example of too much monopoly power is the retail grocery sector in Australia.

Coles and Woolworth's dominate the grocery market with around 80% market share. While this is actually falling as chains like Aldi enter the market by world standards this is a very high share for two companies. The potential for consumers to pay higher prices, or suppliers to be 'bullied' is significant.

Therefore the ACCC is looking at the possibility of Coles acquiring greater market share in the ACT by buying nine Supabarn stores. Although the 'big two' have a lower market share in the ACT than in the rest of Australia (Coles has just 21% of the ACT market) the ACCC don't think it's a good idea to allow Coles to increase their share by as much as they wish to.

The ACCC won't block the entire deal, but will insist some stores of the Supabarn chain go to other retailers. This will allow some of the smaller players to grow and increase competition in the market. That's good for consumers.

The final ACCC decision is expected on Thursday.

The International Business Times covers the story here

This article is relevant to both IB and VCE students on the matter of market structure, concentration ratios and policy to reduce market failure.

When market power corrupts

The free market allocates resources efficiently when it works properly. Unfortunately free markets can fail under certain circumstances and one of those is monopoly power. We can define monopoly power as the ability to influence both the price and quantity in a market.

A measure of monopoly power in the concentration ratio. This looks at the market share of the top three, four or five firms in an industry. The higher the share of the market the more power the top firms have.

The three firm concentration ratio for food retailing in Australia is 85%. Coles and Woolworth's have nearly 75% of the market between them (with IGA third). This gives Coles and Woolworth's monopoly power to some extent. (Note a pure monopoly is when a firm has 100% market share, but monopoly power is about the ability to influence customers and suppliers).

When a firm has monopoly power they can work against the best interests of consumers. They can raise prices and so earn higher profits at the expense of customers.

In the article below Woolworth's are accused of using excessive market power to raise profits by abusing their relationship with suppliers. (Technically monopsony power.)

When a firm has such large market share as Woolworth's it is essential for a supplier to have their product on the stores shelves. Imagine you go to Coles or Woolworth and the chocolate bar you wanted wasn't there. You probably buy an alternative that is there.

Woolworth are accused of demanding unfair terms and payments from suppliers in order to raise their profit. They abuse their market power by doing this and the Australian Competition and Consumer Commission (ACCC) are taking them to court.

While this is unusual in that market power is being exploited to reduce suppliers profits it is an excellent example of the work of the ACCC and monopoly power.

The ABC covers the story here

Questions:

1. Why does large market share give a firm monopoly power in a market even though the industry is actually an 'oligopoly'?

2. How does the action of Woolworth's act against the best interests of consumers?

This article is of critical importance to VCE Unit 3. It provides a recent example of the work of the ACCC and the abuse of monopoly power. For IB this is a useful example for the HL section on theory of the firm and policy to correct market failure.

Collusion but not a cartel or price fixing

The ACCC is taking action to try to close down a website where petrol retailers share information about pump prices.

It would seem that the site, which is a private members site, goes as far as to share information about proposed price changes.

The ACCC believes that this is collusion and against the public interest. It prevents proper competition and so means petrol prices are higher than they would otherwise be.

It should not be a surprise that an oligopoly market structure like petrol retailing leads to some sort of interdependency. But is this collusion? The counter claim is that the information shared is available in large, neon, signs outside petrol stations. Also the nature of the market means that firms charge similar prices and those prices move together.

It is very hard to see if this is collusion or just normal oligopoly behaviour (tacit price leadership). The case will depend on if price changes are discussed in advance. Then it is collusion and there is plenty of case law to support this as the sharing of the information clearly jointly benefits firms interests and works against consumer interests.

Great example if required for the upcoming exam.

The Age covers the story here

Unfair practice? ACCC takes action against Jetstar and Virgin

When a market is an oligopoly the chances of tacit collusion is high. There are only a few airlines operating in the Australian domestic market and the ACCC believes they are operating unfairly.

The issue is the way the airlines advertise a price and then add fees as the booking progresses. The particular issue is how there is a charge for using normal methods of paying.

The ACCC is taking legal action because they feel that it is the low level of competition which is the cause of the problem. 

The ACCC argument might be this. The airlines are deliberately hiding the fees to make them look more attractive to customers. Because the airlines know that they will both make more money by doing this they don't try to compete the fees away. If there was true competition then these high fees would be reduced as an airline started to advertise 'no hidden charges'. 

It is the role of the ACCC to look for market failures due to monopoly power. In this case they may have a point. Customers are being mislead. However if the practise was stopped would the 'headline' airfare rise by the same amount?

The ABC report the story here